What is happening in the markets is a story about fear, unintended consequences, and how markets share information.
If you have been anywhere around the news this week, you have heard about the bond market. We have talked about it, and so has everyone. But what’s happening in the bond market has finally crept into the stock market, and now everyone is feeling it.
Here is the TLDR
Bessent intervened to support bond prices and push yields down. That action signaled to the market that the government is now worried about long-term interest rates; they thought everything was under control, but the government stepping in signals this is now a problem we should all be worried about.
Bond yields shot up again, and the stock market fell because of the signal Bessent sent. I am sure that is not what he intended, but that’s how the market reacted.
How we got here.
The 30-year Treasury has been rising since Covid, but the recent upward pressure started in February, when the U.S. started the War with Iran.
On August 13th, yields moved higher in a trend that spooked the administration. The market was telling us it was worried about the U.S. deficit (expected to be $2 trillion), total debt (hit $40 trillion this week), and the lack of a clear policy strategy to cut spending or raise taxes.
Rather than signal that they are working hard to improve the fiscal position of the U.S. budget, Treasury Secretary Bessent announced on Wednesday that they decided to buy back U.S. Treasuries to prop up demand for U.S. debt.
Yields eased briefly before rising again on Thursday, erasing any effect of the intervention; soon after, the stock market followed.
On Thursday, the Dow dropped 700 points. The reason? The stock market has been, up to now, unconcerned about the risk of higher long-term rates because it didn’t think it was a problem, but the government intervention signaled that it was, in fact, a problem. So much so that it required the government to “prop up” the market.
In trying to quiet the markets, the government intervention created fear.
Dr. A’s Take
This was a self-inflicted wound. The market fundamentals around the deficit, the debt, and the absence of a real spending or tax plan were already known before Wednesday. Nothing in the market changed this week except that the government confirmed, through its actions, that it's now worried too.
What It Means for You
If you’re shopping for a mortgage, have a HELOC, or are carrying any variable-rate debt, you are about to experience higher rates.
If you peeked at your 401(k) Thursday afternoon, as I did, the 700-point drop probably caused you to rethink some of your spending. For those of you nearing retirement, you are probably thinking, does this mean I might have to work a little longer?
Plan for a little more volatility in your financial lives.
We will have to see what happens on Friday, but every action taken and every word spoken will be scrutinized by the markets. Economists are watching how this plays out.